Potential of Securitization in Solar PV Finance

Abstract

Executive SummaryThe following report offers a high-level analysis of the immediate potential that securitization and access to the capital markets could offer the U.S. solar photovoltaics (PV) industry. It is not a "vision" study, and accordingly does not provide a roadmap, nor make any projections. All data used to conduct the analyses in this report are from 2012, and all assessments are therefore based on the installed base of securitizable solar assets as of the close of that year.This report comes as the PV industry is approaching an inflection point of sorts, where the incentives that have driven the recent surge in deployment are either already expired or are set to decline in the near term. Prices for PV technologies and systems continue to decline; however, solar PV remains, in many jurisdictions, a higher-cost source of electricity than more traditional forms of generation on a strictly levelized-cost-of-energy-basis. Faced with diminishing policy support, the PV industry is seeking additional sources of capital (and at advantageous cost) to fund its operations over the mid-to long-term.As is common of many maturing industries, PV is looking to the capital markets-the global forum where entities buy, sell, and trade debt and equity securities-as a venue to obtain this additional capital. The PV industry may access the capital markets by two general means:1. Securitization: The process of transforming illiquid assets (such as the cash flows from a solar lease or power purchase agreement) into standardized, tradable instruments (i.e., securities). Security issuers sell the rights to the underlying assets (via the securities), and the proceeds are used to finance business operations. Issuers pay an interest rate to each investor, the percentage of which is typically dictated by the rating of the securities.2. Bonding: The process of securitizing debt and then issuing it into the capital markets via bonds. By purchasing bonds (and the rights to the cash flows on the underlying debt), investors are in essence lending money to the issuer. The investors are compensated by an interest rate applied to the amount of their purchase payable by the issuer. Bond finance has been used in the marketplace to finance solar projects.Several challenges complicate the PV industry's path to securitization. Harmonizing the relationship of the tax equity tranche of the capital stack and the debt sourced from a securitization transaction is a challenge which will require some financial engineering. Standardization is another barrier: the solar industry currently abounds in a diverse set of asset contracts, installation and operations and maintenance (O&M) practices, and other features of business that make the task of pooling assets (the precursor to securitization) difficult. However, many securitization markets, including mortgages, required innovation and time to achieve viability, and these hurdles may be more symptomatic of growing pains than of permanent barriers.The following analysis aims to demonstrate, hypotheticall...

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